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The chatter in FX circles this week has centred around whether the investor lust for Nvidia shares is spilling over into currency markets.

We noted that Thursday's pullback in the Pound to Dollar exchange rate was centred around the U.S. stock market open that saw billions flow into AI darling Nvidia, offering a hint that demand for U.S. equities is driving USD demand.

Now, analysis from Crédit Agricole and HSBC suggests these suspicions are well founded.

"One of the more interesting developments in FX markets since the start of 2024 has been the close correlation between the USD and the US equity markets in general – and the stocks of the “Magnificent 7” technology companies in particular," says Valentin Marinov, head of FX research at Crédit Agricole.

Crédit Agricole's FX team concludes that the performance of U.S. tech stocks seems to be driving at least some of the recent USD performance.

"The conclusion is further corroborated by the results of our analysis of ETF flows, which suggests that the bulk of the foreign inflows into the US stock market ETFs have been unhedged. Indeed, we think that recent unhedged US stock market inflows gave the USD a boost while the bouts of currency weakness we saw could be due to foreign selling of US (technology) stocks," says Marinov.

But, looking ahead, Crédit Agricole reckons there is a limit to how much the equity market outperformance could support the USD.

"Indeed, the approaching February month-end could see USD-selling from real money investors who rebalance their global equity portfolios. Indeed, we note that months during which the global stock markets have rallied typically saw the USD come under pressure at month-end on the back of rebalancing hedging flows," warns Marinov.

FX researchers at HSBC also see a shift in market dynamics, with U.S. equity market gains now proving supportive of the Dollar, flipping a long-standing relationship between the currency and stocks.

"During much of 2023, the correlation between the USD and equities was notably inverse with the USD’s role as a safe haven the dominant consideration. Thus, when equities were on the defensive amid rising yields in Q3 23, the USD rallied. When equities flourished amid growing market dovishness in Q4 23, the USD struggled. But this connection has weakened with equities and the USD correlations grinding towards zero," says Daragh Maher, Head of FX Strategy at HSBC.